Air Cargo Growth Hits Supply Chain Turbulence

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The seasonal rush to ship goods in time for year-end holidays failed to translate into more consignments carried by airlines because of COVID-related labor shortages and airport congestion, dampening industry momentum after a year of robust growth.

The latest data from two organizations that survey the airfreight market shows that volumes weakened as the fourth quarter progressed, a deviation from the normal pattern during the busiest period for cross-border freight transportation and the first nine months of the year when demand for airlift surged. 

But COVID impacts on crew availability, tightening quarantine rules in Asia and reductions in passenger travel amid high demand during what is typically a slow January period are starting to push airfreight rates back to elevated levels after a late December drop, according to logistics professionals and booking platforms.

The growth rate for air cargo fell sharply in November from the prior month, compared to 2019 levels, according to the International Air Transport Association. Overall demand increased 3.7%, and 4.2% in the all-important international segment,. The growth rate was less than half that of October (8.2% and 9.2% international) and the slowest since January.

Meanwhile, London-based Clive Data reported that cargo demand in December fell 5% versus 2019. The independent market intelligence firm uses a different methodology — a combined weight and dimensional calculation instead of metric tons times distance traveled that can result in double counting transfers — and produces results a month earlier than IATA. And World ACD, another data publisher, reported volumes fell 21% in the last week of the year.

IATA's findings directionally align with those of Clive Data, which has documented the decline in air cargo performance since the beginning of the fourth quarter. The trend started in October with lower-than-expected load factors, followed in November by a 1.2% month-over-month volume contraction and 3% decline compared to 2019. 

Slower growth wasn't the result of lower demand but rather operational strains that reduced efficiency and prevented a portion of shipments from being loaded on aircraft. Consumption, industrial production and export orders all performed well in November. U.S. retail sales, for example, were up 23.5% from 2019 levels. And bookings from manufacturers and retailers were heavy in the second half of 2021 because of factory slowdowns in Asia and shippers converting from ocean shipping to avoid congestion and move goods faster.

Despite favorable economic conditions, staffing challenges due to COVID infections and insufficient storage space at major airports, such as New York's JFK, Los Angeles, Chicago O'Hare and Amsterdam Schiphol, led to processing delays for cargo and planes leaving shipments behind, the organizations said. 

North American carriers posted an 11.4% increase in international cargo volumes in November versus 2019, but that was far below the 20.3% growth rate in October because of the congestion at hub airports, according to IATA.

Airport congestion has existed for more than a year. Ground handling companies responsible for loading and unloading aircraft are struggling  to rehire workers let go during the pandemic downturn and handle an influx of large freighters and cargo-only aircraft that require more workers because they lack mechanized pallet systems. The latest COVID wave is exacerbating those resource challenges.

Omicron shrinks capacity

The lack of cargo capacity on some key trade lanes, such as within Asia, further prevented all the demand from being met. Available space declined 15.7% in the Asia-Pacific region versus the 2019, IATA said.

A capacity shortage resulting from reduced flying by passenger airlines has been a drag on air cargo since the start of the pandemic. If air carriers had more space, they could have booked significantly more sales. Prior to the crisis, more than half of air cargo traveled in the belly of passenger aircraft. IATA said airfreight capacity in November was 7.6% below 2019 levels. Clive Data measured a 12% shortfall in capacity during November and December. The capacity figures are global averages and don't reflect the fact that supply is often tighter in certain regions.

Clive Data said load factors — a measure of how full planes are — were 65% in December,  two points higher than in 2019. The averages don't show that on major trade lanes most planes were booked full.

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On Wednesday, IATA said international passenger demand was 60.5% below 2019 levels, a 4.3-point improvement from October. Overall, passenger volume trailed 2019 levels by 47%. The gradual monthly improvements are likely to be reversed in December and January because of the omicron wave, as many governments reimpose border closures, burdensome testing measures and quarantines for travelers. IATA said international ticket sales made in December and early this month fell sharply compared to 2019. German national carrier Lufthansa said it will cut its winter flight schedule by nearly 10% because the virus is generating uncertainty about travel.

Still, even when there is more passenger airlift, it doesn't always translate into stronger belly cargo growth as shippers increasingly lean toward utilizing all-cargo aircraft when possible, IATA said.

In December, freighter capacity growth slowed several points to 17% above the 2019 level, with belly capacity improving to negative 26.7%. Integrators — FedEx, UPS and DHL — increased haulage capacity by 30% for the year, according to the airline group and the TAC Index.

Meanwhile, the situation appears to be getting worse. Several airlines are dealing with labor shortages of their own due to COVID outbreaks and employees in quarantine. Last year Hong Kong-based Cathay Pacific operated its cargo fleet at about 70% of capacity because of quarantine rules for arriving pilots, and this month it scaled back to 20% functionality after authorities raised the isolation period to seven days. Hong Kong also banned travelers from eight countries for two weeks. 

In China, several airports have temporarily closed or reduced operations as authorities restrict movement in an effort to contain the spread of the omicron variant after positive cases were detected.

Cathay Pacific is one of the world's largest cargo carriers, with a fleet of 20 Boeing 747 freighters. Its flight suspensions are putting a strain on other carriers in Hong Kong trying to pick up the slack, Seko Logistics said in a customer advisory. And the more restrictive Hong Kong COVID measures are making it difficult for charter operators and other new carriers to directly serve Hong Kong because crews will be stranded there for a week. 

The only option for cargo carriers that want to do business in Hong Kong is to change crews in Tokyo or Seoul, South Korea, for flights to North America, and in Bangkok or Hanoi, Vietnam, for flights to Europe, but the extra stops increase costs for fuel, labor and landing fees that add to already high rates.

A new Chinese ban on passenger airlines flying aircraft as temporary freighters will also reduce cargo capacity this year.

The spread of the omicron variant is jeopardizing more flights as pilots and cabin crews call in sick, further reducing cargo capacity in the first quarter of 2022. U.S. airlines were forced to cancel thousands of flights the past three weeks because of severe weather events and workers sidelined by COVID. Alaska Airlines ALK is preemptively canceling 10% of flights for the rest of January, and United Airlines UAL CEO Scott Kirby said in a LinkedIn post Tuesday that the airline is paring its schedule over the short term because about 3,000 employees have tested positive for COVID.

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Delays and heavy baggage loads in the U.S. domestic market are reducing available space for cargo, forcing shipments to sit, be rebooked to another carrier or move by road, Chicago-based Seko Logistics told customers. Some passenger airlines have temporarily restricted certain commodities and closed terminals to help recover from the disruptions.

The combination of strong peak season demand and transportation constraints led to prices that were three to four times higher than typically seen before COVID.

At the end of December, air cargo rates from China to Europe fell 30% from their peak-season highs, to $5.68 per kilogram, with similar declines in Asia-U.S. West Coast routes, according to Freightos, an online marketplace that connects carriers with logistics providers. In the preceding weeks, Freightos data showed China-U.S. prices set a new December record of more than $16 per kilogram, while China-North Europe rates climbed 40% from November to mid-December to more than $8 a kilogram.

Now shipping prices are going back up as capacity tightens again, freight brokers say.

IATA reiterated calls for governments to relieve pressure on supply chains by ensuring air crews don't face COVID protocols designed for air travelers, opening borders for passenger travel and providing policy incentives to address labor shortages.

Absent supply chain bottlenecks, the outlook for air cargo in the first half of 2022 is promising. Stores are focusing on replenishing depleted inventories, retail sales remain strong, the COVID surge is spurring high demand for personal protective equipment, new export orders — a leading indicator of air cargo demand — are up, and volumes will ramp up before many factories close for Lunar New Year celebrations in China next month. The Purchasing Managers' Index for November showed overall delivery times lengthening considerably because of supply bottlenecks, something that many shippers will try to overcome with airfreight.

"We are experiencing the longest and strongest airfreight bull run in recent memory. With little relief coming to broader supply chain congestion, broad demand expected to remain strong and capacity still under pressure, we don't expect much relief anytime soon," wrote Bruce Chan, senior analyst for global logistics at investment bank Stifel, in the Baltic Air Freight Index's newsletter for January. "We think that shippers must continue to plan and budget aggressively, as our timeline for a moderating market continues to get pushed out."

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